WASHINGTON (MNI) – The following is the text of the statement
Saturday on behalf of the European Commission to the IMFMC by EU
Commissioner for Economic and Monetary Affairs Olli Rehn, published
Friday night:

The current outlook for the global economy is subject to high
uncertainty and elevated risk aversion in the financial markets.

GDP growth in the EU and the euro area will remain subdued in the
second half of the year, coming close to standstill at year-end. The
soft patch predicted in our spring forecast is now likely to deepen but
will not result in a double dip. Growth forecasts for the second half of
the year have been revised down considerably, by percentage point for
both the euro area and the EU, compared to our spring forecast.
Nevertheless, as a result of the stronger-than-expected performance in
the first quarter, annual growth is still projected at 1.6% in the euro
area and 1.7% in the EU. The current outlook is uncertain in view of the
ongoing concerns about the sovereign debt crisis, the marked economic
slowdown in the US, sharp increases in risk aversion and financial
market volatility. The balance of risks to the interim forecast is to
the downside.

The euro area sovereign debt crisis continues to weigh heavily on
financial markets and has caused a significant increase in the overall
risk perception. A major factor for the remaining uncertainty is the
fear of spill-overs from Greece to other EU member states. The
spill-overs from the unique situation in Greece are regrettable, because
programme implementation in Ireland and Portugal is providing positive
signals as confirmed by the latest review missions by the Commission,
the IMF and the ECB. In both countries, governments have shown very
strong commitments and have implemented adjustment measures swiftly,
delivering on the agreed objectives. The troika intends to finish its
current review to Greece by end of September. A positive assessment of
compliance with the programme conditionality could allow for the 6th
disbursement under the Greek Loan Facility Arrangement to take place
later in October. The sovereign debt crisis had recently some
spill-overs to Italy and Spain. Both countries are on track to reduce
their debt levels and implement growth enhancing reforms. Gyrations in
financial market movements have prompted them to increase their efforts
and they will implement new measures.

At their Summit on 21st July, Euro area leaders reaffirmed their
commitment “to do whatever is needed to ensure the financial stability
of the euro area as a whole and its Member States”. The toolbox of the
financial assistance mechanisms will be significantly widened and the
lending rates will be reduced to a level de facto comparable to the
borrowing rates of AAA countries. This will enhance the effectiveness of
the EFSF and ESM and allow them to make a greater impact. Broad
agreement has been reached on the guidelines and main features of the
new instruments in the EFSF toolbox, including the possibility, on the
basis of a precautionary programme, to intervene in the secondary
markets and to finance recapitalisation of financial institutions
through loans to governments. These powers will also be applicable to
the ESM and be part of its toolbox. All tools will continue to be linked
to appropriate conditionality. We are confident that all euro area
Member States will ratify the agreement by end of September.

The European Commission also put forward legislative proposals to
substantially strengthen economic governance in the European Union and
in the euro area. While the first ten years of the euro have been a
success, the crisis exposed a number of shortcomings in the policy
framework. Windfalls accumulated during good times have not been
sufficiently used to create room for manoeuvre when times turn bad.

A comprehensive package of legislation has been proposed to address
these issues and the proposals are now very close to agreement. The
package consists of three major building blocks: (i) a reinforcement of
the Stability and Growth Pact and deeper fiscal policy coordination. In
addition to deficits, much closer attention will be paid to debt
developments. A clear benchmark will be introduced defining a
satisfactory pace of debt reduction. There will also be minimum
requirements for national fiscal frameworks ensuring delivery of
budgetary obligations; (ii) a broadening of economic surveillance to
include the prevention and correction of macroeconomic imbalances and
competitiveness challenges. The Commission will monitor a scoreboard of
economic and financial indicators and will carry out in-depth country
analyses. Where necessary it will issue country-specific
recommendations. If an imbalance is perceived to be of a serious nature,
the Member State concerned would be placed in a so-called “excessive
imbalances procedure” that would lead to the issuance of detailed policy
recommendations and regular reporting from the Member States to the
Council of Economics and Finance Ministers; (iii) the introduction of
much stronger enforcement of economic surveillance through the use of
financial sanctions. Progressive sanctions, including deposits and
fines, kick in at an earlier stage of the surveillance process.

Fiscal consolidation remains a top priority for all countries in
the EU, but the extent of necessary adjustments differs across the
countries. With a view to keeping the balance between stabilisation and
fiscal sustainability in mind, adherence to current fiscal consolidation
plans seems appropriate if the slowdown remains limited. In this case,
the projected fiscal stance would continue to be countercyclical.
However, in the event of a more significant and protracted slowdown or
even a contraction of economic activity the fiscal stance might become
pro-cyclical. Under that condition, current fiscal adjustment plans
might have to be reassessed, although on a country-bycountry basis.
Specifically, only countries with more fiscal space and on track to
correct excessive deficits should primarily let automatic stabilisers
work around the agreed path of structural fiscal adjustment. Additional
policy responses should only be considered for these countries if growth
collapses. Conversely, countries having accumulated significant
adjustment gaps should step up consolidation efforts. Moreover,
programme countries and those under close market scrutiny should
strictly adhere to headline targets. In this regard, it is of the utmost
importance that policy actions on the fiscal side fall within the
commitments under the Stability and Growth Pact since adherence to its
provisions is key to safeguard or rebuild fiscal credibility, especially
in view of the ongoing turbulence in sovereign debt markets.

The EU is strongly committed to achieving necessary financial
reforms and has made significant progress on a comprehensive package
that incorporates several primary areas: better supervision, better
regulation for financial services, greater consumer and investor
protection and the development of appropriate mechanisms for crisis
prevention, management and resolution in order to minimize the cost to
taxpayers and disruptions to the financial system and the economy as a
whole.

Importantly, the ESRB and the new European Supervisory Authorities
for the banking, securities and insurance and pension systems started
operating in January and are already tackling the critical issues in
each of their respective domains. Furthermore, in late July, the
European Commission proposed amendments to the Capital Requirement
Directive (CRD-4) and, for the first time, introduced a regulation (CRR)
translating the Basel III guidelines for banking prudential regulation
into EU law.

Such reforms are needed if we are to restore the financial sector
to full viability and regain market confidence. Meanwhile, a sound,
stable, and more strongly capitalized financial sector will be better
placed to provide credit to the rest of the economy including to
households and small businesses. The 2011 EU-wide bank stress test
provided incentives to increase capital ahead of the test (around E50 bn
in the first four months of 2011 only). In the light of its results,
remedial plans (recapitalisation and restructuring) are expected in the
next 6 to 9 months.

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** Market News International Washington Bureau: 202-371-2121 **

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